O’Cass & Ngo (2011, p. 646) suggest the “… primary pursuit of any business is to understand what customers value and to create that value for them”. This begs the question as to what constitutes value. The dictionary definition of value is “the regard that something is held to deserve; the importance, worth, or usefulness of something” or “the material or monetary worth of something” (OUP, 2010). Thus, it can be seen that the concept of value is quite straightforward, while at the same time being quite subjective and rather nebulous. There is an American colloquial expression ‘I know what it is when I see it’77 and to an extent, the same can be said about value. In context of delivering a product or service, value can be thought of as a preferred combination of benefits, in whatever way they are defined, compared with the costs entailed in obtaining them (Morrissey et al., 2014). In this view, “value is determined by the utility combination of benefits delivered to a customer less the
total costs of acquiring the delivered benefits” (Walters & Lancaster, 1999, p. 643).
Bowman & Ambrosini (2000, p. 2) note “a tendency in the literature to use the term ‘value’
to refer to different phenomena”78. This use of language is evident for example, in Sirmon,
Hitt, & Ireland (2007, p. 273) who speaking from the firm’s perspective, using somewhat circular language, suggest that “value creation begins by providing value to customers”. While they are using the same term ‘value’ it is apparent they give particular focus to the seller’s value. Thus, when they say “the primary pursuit of business is to create value” (2007, p. 273), they are actually referring to value for the firm, for Conner, to whom they attribute the view, actually said “the ultimate purpose of any firm is to maximize profits” (1991, p. 123).
The value placed on a product or service by a customer is inherently subjective and can be
77 The expression was quite famously used by US Supreme Court Justice Stewart in 1964 describing
his threshold test for obscenity (Gewirtz, 1996, p. 1023).
78 It which they were specifically referring to the exchange value i.e., monetary value realised by sale
based on their “beliefs about the goods, their needs, unique experiences, wants, wishes and
expectations” (Bowman & Ambrosini, 2000, p. 2). From an economic perspective, such
perceptions, based on customers’ so-called value systems79,80, determine the marginal
value component of the price i.e., the difference between the costs and the value they perceive, including values such as prestige, appearance, aesthetic or moral reasons (Neap & Celik, 1999, p. 181)81. Zeithaml (cited in Ravald & Grönroos, 1996, p. 22) defines customer-
perceived value as the consumer’s overall assessment of the utility of a product based on what is given and what is received. These perceived benefits are combination of physical, service and support attributes of a product, other perceived (tangible and intangible) quality indicators and the price paid to obtain it (Ravald & Grönroos, 1996, p. 22). Walters & Lancaster (1999, p. 644) suggest that how a statement of how firm delivers value to customers, in other words its value proposition, is important both within the company, as a means of identifying the value it is offering customers, and externally as a way to position itself and its products in customers’ minds.
4.2.2 Value proposition
Value propositions establish and described how features of products and services are assembled and offered in order to meet customers’ need (after Lanning & Michaels, 1988, p. 12). One of the first conceptualisations of value proposition was Lanning & Michaels (1988, p. 5). In a paper appropriately entitled ‘A Business is a Value Delivery System’, they posit that the formulation of a value proposition and development of a system to deliver it to customers, is behind a successful business strategy. In their approach, as illustrated in
79 According to Rokeach (1968, p. 160), values are beliefs that “transcendentally guide actions and
judgements across specific objects and situations”
80 Narasimhan, Bhaskar, & Prakhya (2010) provide a good review of the concepts associated with
person value systems
81 Such theories are based on the idea of the customer making rational choices that provide maximum
benefit to them. Such rational choice models are the dominant in thinking on consumer behaviour (Jackson, 2005, p. 7). However, this view of people as homo economicus is not without its critics and its limitations (see, e.g., Jackson, 2005, pp. 35–42). While this debate is outside the scope of this thesis, it is useful to consider the issues particularly in the case of occupants and end-users of
renovated buildings. Practice theory approaches are gaining ground with regard to everyday activities including energy-related behaviour (see e.g., Røpke, 2009; Shove & Walker, 2010; Walker & Shove, 2007).
Figure 29 below, they reimagine the business system, which had traditionally been dedicated to producing and selling products, as one focused on delivering value to customers. The contrast between the two systems are made more apparent by the colour schemes which indicate the counterpart of the different components in each system – albeit that not all match exactly related.
Figure 29: Product orientated system and value delivery system (derived from Lanning & Michaels, 1988, p. 12)
The most striking difference is that in the traditional product orientated system, a product was design and made and research undertaken to devise effective product positioning, pricing, promotion and marketing strategies to maximise sales to potential customers. It could almost be argued in the traditional approach products were designed and made before a full understanding of what customers wanted was identified. Lanning and Michaels’ (1988) reconceptualisation of business operations as delivering value to customers, turned this approach on its head – their central thesis was that business needed to understand what prospective customers wanted before designing a product.
proposition. They acknowledge that companies often discover a successful business proposition only after the fact, but posit that “what distinguish winners is that they do find,
develop or recognise that winning proposition” (1988, p. 5). Their approach to devising a
value proposition comprises three steps: (i) analyse the market and segment by customers’ desired value; (ii) evaluate opportunities in each market segment; and (iii) choose the value proposition that best address these opportunities (1988, p. 6). A checklist outlined in Table 8 below is offered as a means of selecting the most appropriate value proposition for a firm to offer.
Table 8: Value proposition checklist (derived from Lanning & Michaels, 1988, p. 10)
Clarity needed on: Evidence needed for: Assurance needed that: benefits to be offered adequate market demand the best of several value
propositions considered prices to be charged acceptable returns The value proposition is
clear and simple customers to be targeted viability in light of competition superiority of value proposition for target market segment achievability i.e., requiring only feasible changes in current business In the value delivery system model, the value proposition ideally needs to be reflected in every function of the firm82, as illustrated in the structure of the model shown in Figure 29 on page 123. Here the traditional activities associated with product design, manufacturing, after-sales service, pricing, and distribution are each considered as components of value provision. This contrasts with the traditional perspective, where they would be considered quite separate and divided amongst the product creation, production and sales activities – as illustrated by Figure 29 on page 123.
Similarly, the consideration of value continues with the activities of crafting the sales message, advertising campaigns, promotions and general public relations. The
82 Lanning and Michaels (1988, p. 13) observe that “(a) value proposition may be successfully
delivered without echoing through every function of the business, but the chances are improved the more that each element of the business reinforce the same objective”.
disaggregation of activities of the traditional product-centric model of a firm, and conceptualisation in terms of a system for delivery value leads to reimagining the function of activities, and their links to each other and to the overall business strategy. In this regard, market research is a particularly interesting example. Traditionally, it is fundamentally considered a marketing activity, principally influencing how a product is positioned on the marketplace – while, in the value delivery model, such knowledge of the market is instrumental in the creation of the value proposition and directly feeding into the design of product and services.
4.2.3 Delivering value
So, if it is accepted that the essential process of business is delivering value to customer, Osterwalder and Pigneur’s (2010, p. 14) succinct description of business model as the “rationale of how an organization creates, delivers, and captures value” is particularly relevant. The following section shall explore the concept of business models, which are fundamental centred around the delivery of a value proposition to customers.